UK: Giving A Share Is Good - Tax Reliefs

Last Updated: 31 October 2007

The income tax advantages from making cash donations to UK charities under the Gift Aid scheme are widely known. Less well known are the more generous lifetime tax reliefs available on the gift of certain assets to UK charities.

A gift of an asset to charity, either outright or at a price less than its cost, is treated as disposed of at no gain/no loss. The donor therefore obtains full capital gains tax (CGT) relief on any inherent gain.

Income Tax Relief

Since April 2000, there has also been income tax relief available on the gift of ‘qualifying investments’ to a charity. They include:

  • quoted shares or securities
  • units in an authorised unit trust
  • shares in UK open-ended investment company (OEIC)
  • interest in an offshore fund
  • a ‘qualifying interest in land’ from April 2002.

With this relief the donor gets an income tax or corporation tax deduction for the net benefit to the charity (normally the market value) of the qualifying investment, plus incidental expenses of the transfer, less any consideration or benefit received by the donor. This relief is in addition to the CGT relief and means it can be significantly more beneficial for the donor to give shares rather than sell the shares and donate the proceeds.

The tax relief is claimed via the tax return for the year in which the gift is made. Those in employment, or receipt of a pension, can ask for their Pay As You Earn tax coding to be adjusted during the tax year of the gift, so receiving the benefit of the tax relief earlier.

It should be noted that the income tax relief on gifts of qualifying investments is given as a deduction against income. In order to obtain maximum relief, an individual should not give away shares worth in excess of income otherwise taxable at 40%.

Although larger charities often have a department to assist with processing of such gifts, not all charities can receive shares and some might not accept shares in particular companies for ethical reasons. If the charity cannot receive the shares, for whatever reason, it may be possible for them to be sold on behalf of the charity in order to maximise tax relief. Professional advice is recommended in such cases.

Inheritance Tax Exempt

Gifts to charity are broadly exempt from inheritance tax regardless of whether the gift is made during the donor’s lifetime or as a legacy in a will. If an intended donation can be made during one’s lifetime without causing concern over the loss of capital/income, then doing so can be more tax efficient and possibly more rewarding. It is important to update the will if the lifetime gift is intended to replace the one in the will.

Selling v Giving

The example in the box below highlights the difference between the gift of the sale proceeds and that of the qualifying asset itself.

Say Mary is a higher-rate tax payer who wishes to make a charitable donation using £100,000 worth of shares. It has been assumed that they have an inherent CGT liability of £12,000.

If we say the net value of Mary’s shares is £88,000 (their value less the inherent CGT liability), her net cost in giving the shares becomes £48,000. The charity is, however, worse off as it does not obtain a basic-rate tax ‘refund’ on receipt of the shares. Mary might be minded to use part of her saving to make an additional donation.

The changes proposed for CGT in the 2007 Pre-Budget Report will have an impact on the inherent CGT liability, but not affect the underlying basis of the relief or the calculations.

Mary sells the shares:

£

Net proceeds/gift

£100,000 less £12,000 CGT

88,000

Grossed up value to the charity

£88,000 plus basic-rate tax credit

112,820

Mary’s higher-rate tax relief

@18% thereon

20,308

Net cost to Mary

£100,000 less £20,308

79,692

Real cost to Mary

£88,000 less £20,308

67,692

Mary gifts the shares:

£

Value of the gift and of receipt by the charity

100,000

Mary’s income tax relief

@40%

40,000

Net cost to Mary

£100,000 less £40,000

60,000

Real cost to Mary

£88,000 less £40,000

48,000

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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